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Washington Amends Foreclosure Mediation Procedures
On March 31, Washington Governor Jay Inslee signed into law HB 2723, which amends the foreclosure mediation process established by the 2011 Foreclosure Fairness Act. The bill, which takes effect June 12, 2014, amends the meet-and-confer process to (i) require that notice of pre-foreclosure options a beneficiary or authorized agent is required to send to the borrower must be sent by first-class registered or certified mail, return receipt requested; (ii) require that in-person meetings must be held in the county where the property is located, unless the parties agree otherwise; and (iii) amend the "foreclosure loss mitigation form" to add options for describing or explaining meet-and-confer efforts. The bill also alters mediation provisions to (i) allow mediation upon agreement of the parties, even if the borrower failed to elect mediation in the required timeframe; (ii) require beneficiaries to disclose any investor restriction that prohibits the beneficiary from implementing a modification and not just the portion or excerpt of a pooling and servicing agreement that includes such a prohibition; and (iii) require mediation to take place in the county where the property is located.
Freddie Mac Requires Lender-Place Insurance Compliance Certification, Updates Foreclosure And Transfer Tax Policies
On March 17, Freddie Mac issued Bulletin 2014-3, which requires servicers to provide a certification that they are or will be in compliance with new lender-placed insurance requirements announced in Bulletin 2013-27. With regard to alternatives to foreclosure, Bulletin 2014-3 (i) makes optional requirements announced in Bulletin 2013-27 related to the processing of modifications for mortgages with pre-modification mark-to-market loan-to-value ratios less than 80%; (ii) requires servicers to provide notices on behalf of Freddie Mac in certain circumstances when Freddie Mac participated in evaluating a borrower for a workout or relief option and declined to approve the workout or relief request; (iii) reorganizes property valuation requirements for modifications; and (iv) provides additional guidance related to paystub requirements for income documentation submitted with a Borrower Response Package. Finally, Freddie Mac also (i) updated requirements for the reimbursement of transfer taxes; (ii) permitted servicers to instruct foreclosure counsel to conduct a foreclosure in Freddie Mac’s name, without obtaining prior written approval, if doing so would avoid any obligation to pay a transfer tax; and (iii) provided guidance on numerous additional servicing issues.
Cleveland Federal Reserve Bank Examines Benefits of Fast-Track Foreclosure
On March 6, the Federal Reserve Bank of Cleveland published a staff commentary that examines how the implementation of a fast-track foreclosure process in Ohio and Pennsylvania would affect the housing markets in those states. The researchers explain that the current foreclosure laws in Ohio and Pennsylvania create “deadweight losses” for those state’s economies, i.e. costs without corresponding benefits, associated with vacant, foreclosed homes. Specifically, the researchers estimated for those two states: (i) the number of foreclosures that sit vacant; (ii) the amount of deadweight loss associated with vacant homes; and (iii) annual savings under a fast-tracking framework that eliminates deadweight losses. Their findings suggest that fast-tracking foreclosures would “shave between 8 and 43 days off the average duration” of vacant homes in Ohio, and between 9 and 20 days in Pennsylvania, eliminating an estimated $24 to $129 million of deadweight loss in Ohio, and $24 to $54 million in Pennsylvania.
New Mexico Supreme Court Analyzes State's Foreclosure Standing Requirements, Ability To Repay Standard
On February 13, the New Mexico Supreme Court held that a borrower’s ability to repay a home mortgage loan is one of the “borrower’s circumstances” that lenders and courts must consider in determining compliance with the New Mexico Home Loan Protection Act (HLPA). Bank of New York v. Romero, No. 33,224, 2014 WL 576151 (N.M. S. Ct. February 13, 2014). In this case, after two borrowers became delinquent on a cash-out refinance mortgage loan, a bank initiated a foreclosure action in state court. The trial court and appellate court rejected the borrowers’ arguments that the bank failed to establish that it was the holder of the note and that the loan violated the “anti-flipping provision” of the HLPA, which prohibits creditors from knowingly and intentionally making a refinance loan when the new loan does not have reasonable, tangible net benefit to the borrower considering all of the circumstances—i.e. “flipping” a home loan. The Supreme Court reviewed the state’s stringent standing requirements and held that possession of the note alone is insufficient to establish standing and that the bank failed to provide other evidence sufficient to demonstrate transfer of the note. Although its decision on standing mooted the issue of the alleged HLPA violation, the court decided to address the issue given some party may eventually establish standing to foreclose. The court, in what might be considered dicta, stated that although the “anti-flipping provision” of the HLPA did not specifically include ability to repay as a factor to be considered in assessing the “borrower’s circumstances,” it could find “no conceivable reason why the Legislature in 2003 would consciously exclude consideration of a borrower’s ability to repay the loan as a factor of the borrower’s circumstances.” As such, the court stated that the HLPA’s “reasonable, tangible net benefit” requirement must include as a factor “the ability of a homeowner to have a reasonable chance of repaying a mortgage loan,” and that here the lender failed to do so when it claimed to rely solely on the borrowers’ assertions about their income and failed to review tax returns or other documents to confirm those assertions. Finally, the court also stated that (i) the National Bank Act does not expressly preempt the HLPA; (ii) the bank failed to prove that conforming to the dictates of the HLPA prevents or significantly interferes with its operations; and (iii) the HLPA does not create a discriminatory effect. The Supreme Court reversed the lower courts’ decisions and remanded to the district court with instructions to vacate its foreclosure judgment and to dismiss the bank’s foreclosure action for lack of standing.
Ninth Circuit Holds Failure To Remove Fees From Withdrawn Foreclosure Violates SCRA
On February 7, the U.S. Court of Appeals for the Ninth Circuit held that the attempted collection of past due foreclosure-related fees from a borrower in active duty military service is a violation of section 533 of the Servicemembers Civil Relief Act (SCRA). Brewster v. Sun Trust Mortg., Inc., No. 12-56560, WL No. (9th Cir. Feb. 7, 2014). The district court dismissed an active duty servicemember’s suit against the current and former servicer of his mortgage loan after the current servicer failed to remove fees associated with a foreclosure initiated, but then withdrawn, by the prior servicer. SCRA section 533 bars the “sale, foreclosure, or seizure of property” for the breach of certain obligations relating to a mortgage made before a servicemember’s military service, unless such action is pursuant to a court order or a valid SCRA waiver, and also establishes criminal penalties for a person who knowingly makes, causes to be made, or attempts to make such a prohibited sale, foreclosure, or seizure of property. On appeal, the Ninth Circuit concluded that the failure to remove the fees incidental to the previous foreclosure’s Notice of Default was a continuation of the previous “foreclosure proceeding,” and, therefore, a violation of section 533. The court did not consider whether the Notice of Default had been initially filed in violation of section 533. The court’s reasoning hinged on its reading of what the word “foreclosure” encompassed and based its interpretation on (i) a state-law statutory definition of foreclosure that the court determined included the attempted collection of foreclosure fees as part of the foreclosure proceeding, and (ii) the U.S. Supreme Court’s unambiguous requirement that courts broadly construe the statutory language of the SCRA. The court declined to determine whether SCRA allows punitive damages, as the DOJ had urged it to do in an amicus brief. The court reversed the district court’s dismissal of the borrower’s suit and remanded for further proceedings.
Sixth Circuit Holds PTFA Preempts Less Restrictive State Law, May Be Used To Establish State Law Causes Of Action
On February 7, the U.S. Court of Appeals for the Sixth Circuit held that while the Protecting Tenants at Foreclosure Act (PTFA) provides no private cause of action, plaintiffs may use violations of the PTFA to establish elements of a state law cause of action. Mik v. Fed. Home Loan Mortgage Corp., No. 12-6051, 2014 WL 486214 (6th Cir. Feb. 7, 2014). Tenants filed suit alleging they were unlawfully evicted from their rental home after their landlord defaulted on her mortgage and the property was sold at a foreclosure sale. The trial court held that the tenants only asserted claims under the PTFA, which does not grant a private right of action, and dismissed the complaint. On appeal, the Sixth Circuit affirmed that the PTFA does not provide a private cause of action, and that, under the Supremacy Clause, the PTFA preempts state law that is less restrictive of tenants. However, it held that, because tenants have no opportunity to raise PTFA as a defense in cases where successors in interest do not initiate judicial proceedings, they must be permitted to use available state law causes of action, such as wrongful eviction, to enforce the PTFA’s protections. To hold otherwise, the court explained, would render the PTFA’s protections virtually meaningless because “a foreclosure sale purchaser could ignore its protections with impunity, bypass judicial process and evict any tenant without notice or court process.” The court held that, here, the tenants’ allegations that the successor failed to meet certain requirements of the PTFA were sufficient to support a claim for the tort violation of wrongful eviction. The court did not find that the tenants similarly sufficiently alleged due process violations and outrageous infliction of emotional distress under Kentucky law. The court reversed in part and affirmed in part, and remanded for further proceedings.
Nevada Judge Sanctions State AG In Robosigning Suit
On January 30, Nevada’s Clark County District Court ordered the State AG to pay attorneys’ fees in connection with a mortgage servicing vendor’s attempts to obtain discovery in the state’s case alleging the company facilitated fraudulent residential foreclosures, including through so-called “robosigning” tactics. Nevada v. Lender Processing Svcs., Inc., No. A-11-653289-B, (Nev. Dist. Ct. Jan. 30, 2014). The company asserted that the AG abused the discovery process by repeatedly failing to produce materials sufficient to support its claims under the Nevada Deceptive Trade Practices Act. The court rejected the AG’s defense, among others, that the alleged discovery deficiencies simply reflect disagreements between the parties over the evidence necessary to support a claim under state law. Although not a direct issue in this case, the company’s brief repeatedly calls out the AG’s use of outside counsel and notes a challenge to the AG’s use of an outside firm on a contingency fee basis, which is pending before the state supreme court.
California Appeals Court Revives Tenants' Claims Against Foreclosing Bank
On January 23, the California Court of Appeal, Sixth District, held that under the federal Protecting Tenants Against Foreclosure Act (PTFA) a lease survives foreclosure through the end of the lease term, except under limited circumstances, and allows tenants to bring state law claims for violation of the federal law. Nativi v. Deutsche Bank Nat’l Trust Co., No. H037715, 2014 WL 255587 (Cal. Ct. App. Jan. 23, 2014). Two tenants sued to challenge their eviction by a bank that through a nonjudicial foreclosure sale purchased the property the tenants were renting. The trial court held that the eviction was not improper because the foreclosure sale extinguished the lease under California law and, therefore, the bank, as immediate successor in interest did not step into the shoes of the landlord. The trial court held that the PTFA only required the bank to give a 90-day notice to vacate the premises; the PTFA did not require the bank to assist the tenants in recovering possession of the leased premises. On appeal, the tenants challenged the trial court’s interpretation of the PTFA. The appeals court held that the PTFA causes a bona fide lease for a term to survive foreclosure through the end of the lease term, and grants only limited authority of the immediate successor in interest to terminate the lease, with proper notice, upon sale to a purchaser who intends to occupy the unit as a primary residence. The court explained that while the PTFA impliedly overrides state laws that provide less protection, it expressly allows states to retain the authority to enact greater protections. The court added that California law protects bona fide tenancies for a term that continue by operation of the PTFA, and explained that although the PTFA does not itself provide a private right of action, it can be enforced through litigation under state law claims. After finding that there were triable issues of fact, the court reversed the trial court’s order granting summary judgment to the bank and reinstated the tenants’ claims.
HUD Replaces Delinquent Borrower Publication
On January 10, HUD issued Mortgagee Letter 14-01, which notifies mortgagees that within 30 days they must begin using a new brochure for sending notice to delinquent FHA borrowers. HUD regulations require mortgagees to send the notice to FHA borrowers in default between the 32nd and 60th day of delinquency. Notice includes a cover letter and a brochure with foreclosure-related advice for borrowers. The new brochure, “Saving Your Home: Tips to Avoid Foreclosure,” replaces the “How to Avoid Foreclosure” brochure, HUD-PA-426, and includes information on revised loss mitigation tools available to FHA-insured borrowers. The mortgagee letter also reviews the requirements for the cover letter that must accompany the brochure, and provides a link for mortgagees to order the brochure.
Illinois Extends Foreclosure Protection
On December 26, Illinois Governor Pat Quinn signed SB 1045, which extends through 2015 an existing state foreclosure protection. Under state law, a borrower facing foreclosure can seek to block a judicial foreclosure sale based on a pending federal HAMP modification. The state protection was set to expire at the close of 2013, but was extended to match the federal extension of HAMP through December 31, 2015.